Prime Minister Narendra Modi’s visit to Jammu and Kashmir on 4 July is expected to not only give direction to the security-related issues but also give an impetus to trade across the line of control (LoC). This is likely to come following the recent visit of officials from the Union ministry of home affairs, who assessed the cross-LoC impediments and have recommended measures such as provision of international subscriber dialling (ISD) facility for government officials and the trading community, expansion of the list of tradable items from the existing 21 items, opening banking facilities on both sides of the border, increasing the number of weekly trading days and installation of full body truck scanners.

While these measures are welcome steps, they indicate a move towards normalizing trade between the two countries. These measures facilitate a shift from barter trade to a formal and institutionalized trade through banking channels. This shift would have to be done gradually. During the transition phase, other measures need to be taken so that the shift is smooth for traders in the two parts of Kashmir. At present, there is a limit of 100 trucks that can cross LoC per day. This should be increased and the infrastructure to facilitate it would need to be put in place. A modern check post on the lines of the integrated check post at Wagah/Attari will address several of the infrastructural problems being faced by businesses on both sides. The number of trading days can also be increased to seven from the present four per week. In addition, the number of trading hours can be increased to 12 as is being done at the Wagah/Attari border.

At present, trade through barter is based on mutual trust without any formal contract. In cases of dispute, there is no formal mechanism that traders can seek recourse to. An interim measure for traders to meet at the border to resolve mutual disputes could be put in place by allowing them temporary permits for 12-24 hours. Such permits are already being issued to truck drivers and could be extended to traders as well. LoC trade can also benefit through exhibitions being organized in the two parts of Kashmir. Such exhibitions in other states have had a very positive impact on trade expansion between the two countries.

The current arrangement of barter trade at the LoC is being carried out at zero duty. Even though trade in the notified commodities is supposed to take place in locally produced goods, in practice, goods are being diverted from other states and from third countries to avail of the zero-duty. Traders have devised mechanisms such that trucks from other states enter Jammu and Kashmir from Lakhanpur where the goods are unloaded and then loaded on to J&K trucks. The goods are then trans-shipped again at the LoC from Indian trucks to Pakistani trucks. All this adds significantly to transaction costs.

Full normalization of trade at the LoC would mean addressing these distortions. While this shift would mean an imposition of duties applicable under SAFTA (South Asian Free Trade Area), trade facilitation measures will provide benefits through lower transaction costs, which is likely to outweigh the costs incurred by traders through customs duties which at present do not exceed 5%.

The two governments need to lay down a clear road map for formalizing LoC trade and bringing it within the ambit of SAFTA. A clear direction would perhaps reduce the pain of adjustment and in the long term, lead to peaceful and prosperous economic relations between the two Kashmirs.